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Did China Just Toss A Monkey Wrench Into Rally?

Chatter on the Street suggests that China may have just thrown a monkey wrench into the rally.

As you likely know, China's central bank surprised the Street on Tuesday with its first increase of interest rates in nearly three years, a move that could mark the start of a more aggressive phase of monetary tightening in the world's fastest-growing major economy.

In the wake of the move, oil and gold prices tumbled, stocks turned negative and – perhaps most important - the dollar jumped.

Investors took the developments as a signal Beijing was getting more serious about curtailing growth.

In turn money rotated out of riskier assets such as commodities and equities and into safe havens such as the greenback.

The weak dollar has been largely tied to moves in the S&P – as the dollar goes lower the resource names have taken off like wild fire – a major factor behind the market’s recent gains.

And that trade may be over – at least for the time being. According to Rich Ilczyszyn of Linn-Waldock we may be looking at a dollar bounce for quite some time.

He points to a series of factors – the dollar has already declined so sharply it’s due for a retracement, he says. Also expectations that Republicans win the House could put a floor under the greenback.

And, ontop of all that, he thinks QE2 could be smaller than the market has already anticipated – a catalyst that could also send the dollar higher.

Steve Cortes is in full agreement. On the Halftime Report he told the desk that he was largely bearish on the China trade and a seller of resources.

If you’re looking for a ‘tell’ look at crude , says Cortes.

Oil tested its August high several times and failed. Unless it can get above it’s August highs and confirm the S&P rally - it tells me demand from China is not there.

But that doesn’t mean you should head for a bunker and stock up on canned foods.

Ilczyszyn is long term bullish. Looking at gold, “I think we could see gold pullback as much as 10% from the recent high of 1388,” he explains. “But then I’m a buyer between 1247 and 1250.”

In fact he’s long-term bullish on all metals. “I just think we need to have a healthy correction,” he says.

What do you think? We want to know!

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Trader disclosure: On Oct.19, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Grasso owns (ASTM), (BA), (BAC), (C), (CSCO), (JPM), (LPX), (MO), (MOT), (NDAQ), (PFE), (PRST); Cortes is short oil; Cortes is short gold; Cortes is short the Euro; Cortes is short (RSX); Cortes owns the S&P 500;Finerman owns (AAPL); Finerman & Finerman’s firm own (BAC); Finerman & Finerman’s firm own (JPM); Finerman’s firm owns (IBM); Finerman’s firm owns (SKS); Finerman's firm is short (IJR); Finerman's firm is short (MDY); Finerman's firm is short (SPY); Finerman's firm is short (IWM); Finerman’s firm owns S&P 500 puts; Finerman’s firm owns Russell 2000 puts; Pete Najarian owns (AAPL) call spread; Pete Najarian owns (BAC); Pete Najarian owns (CRUS); Pete Najarian owns (MS); Pete Najarian owns (YHOO); Pete Najarian owns (DO); Pete Najarian owns (DD); Pete Najarian owns (CNI); Pete Najarian owns (NOV); Pete Najarian owns (TEVA); Pete Najarian owns (NFLX) call spread; Pete Najarian owns (BMC) call spreads; Pete Najarian owns (AKAM) call spreads; Pete Najarian owns (RDN) call spreads; Pete Najarian owns (STX) call spreads; Pete Najarian owns (TSO) call spreads; Pete Najarian owns (LNC) call spreads

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